How payment card processing works

Learn everything you need to know about how payment card transactions are processed.

Before you start accepting payment cards

Create a merchant account

Contact a payment card processing company, otherwise known as an acquirer. This could be a bank or some other financial institution. Once you set up your merchant account, you will receive a unique account number.

Learn about card processing methods

Depending on whether you will be accepting payment cards in store, online, or over the phone, your point of sale configuration could include a terminal, an electronic register, a software program, or a mobile device.

Almost every terminal in the marketplace today can support American Express®.

See an overview of the transaction process

Select the steps below to learn more about how payment card transactions are processed.

Authorization

Transaction is approved or denied

Submission

Transactions are sent for payment

Settlement

Merchant receives payment

Authorization

Transaction is approved or denied

A customer makes a purchase and the merchant uses a mobile, web or phone program, or a standard in-store terminal to collect the customer's payment card information.

A customer makes a transaction

The transaction information is sent to a payment card processing company. These companies are also called "merchant acquirers" and can be banks or other financial institutions.

Transaction details are sent to the acquirer

The acquirer sends the transaction information to the payment card network, which acts as an intermediary between the payment card processing company and the issuer of the customer's card.

Transaction details are sent to the network

The network sends the transaction information to the card issuer, who verifies the card and makes sure there are enough funds to cover the transaction amount before returning a decision - typically within seconds.

The transaction is approved or denied by the issuer

Step 2

Submission

Transactions are sent for payment

Step 1

The merchant submits authorized transactions to the acquirer either in real time or in batches that have accumulated over a given period of time. The acquirer then sends transaction details to the networks.

Authorized transactions are sent for payment

The cards networks separate the transactions and send them to the appropriate card issuers for processing.

Transactions are sent to the card issuers

The card issuers receive the transaction information and process payment back to the merchant.

Card issuers process the payments

Step 3

Settlement

Merchant receives payment

Step 2

The card issuers send payments back to the networks to be dispersed to the acquirers. The networks and the acquirers may take applicable rates and fees before the funds get to the merchants.

Funds are sent through the networks back to the acquirer

The merchants receive funds via either Net Pay or Gross Pay, depending on their transaction patterns. Funds go into the bank accounts they identified when they set up their accounts.

Merchants receive payment

Did you know?

American Express is a closed loop network, operating in all parts of the payment chain, making transactions more secure.

Apply for American Express®&nbspmerchant account

Service and support

Having a merchant account will ensure that your payment card transactions are processed and your business gets paid. But not all merchant accounts are equal. Most offer basic maintenance and support. An American Express merchant account gives you access to tools and services that can help you run your business.

Sometimes called a card processor, this is an institution that provides card-processing services to merchants. Merchant acquirers are divided into two categories: bank acquirers and non-bank acquirers. Bank acquirers are financial institutions that provide merchant acquiring services in addition to other banking solutions. Non-bank acquirers, or Independent Sales Organizations (ISOs), work under the supervision and sponsorship of a bank, and generally specialize in providing acquiring services. An acquirer sends transactions to the card networks, and gets paid by the card networks and then funds the merchants

Charge cards&nbsprequire that the full amount charged be paid each month. They typically do not have periodic finance charges but often have annual fees. Charge cards do not generally have a preset spending limit, which allows customers to make large, spontaneous purchases.

Corporate cards&nbspare credit, debit or charge cards designed for business use. They are often tailored to specific business needs such as office supplies, business services or corporate travel. Corporate cards are issued by both small and large businesses to allocate funds for employee expenses, monitor employee expenditures, separate personal and business expenditures, and borrow funds for business purchases. By accepting these cards, a merchant is assured that he/she will not miss out on big sales.

Credit cards&nbspprovide a revolving line of credit, which acts as a loan allowing customers to borrow money to make purchases. The balance can often be carried from month to month and interest accrues on amounts charged.

Debit cards&nbspallow a customer access to the funds in their bank account for purchases. When debit card account data is sent for authorization, the card issuer debits the customer's account so the funds are removed immediately. The time it takes to provide the funds to the merchant varies according to the terms of the merchant agreement.

Gift cards&nbspare cards that are pre-loaded with a dollar amount and given as gifts for the recipient to purchase what he/she wishes. When a business accepts cards, it allows its customer to use the gift card on the items he/she wants and honor the intent of the gift giver.

Prepaid cards&nbsphave a monetary amount pre-deposited into the account, determining the quantity of funds available. These are often reloadable and can be sold at retail outlets. Prepaid cards can be branded with a merchant's logo and can be restricted so that they can only be redeemed at that merchant's locations.

Ways to accept payment cards

Payment terminals&nbspare minicomputers that securely collect card information and transmit transaction data to acquirers for authorization and payment. They typically feature a keypad and a card swipe reader. The terminals are connected to the business' acquirer via a phone line or the Internet. Merchants can use stand-alone devices or have the payment terminal integrated into an Electronic Cash Register solution.

Electronic Cash Register&nbsp(ECR) is a software solution that manages merchants' point of sale needs, including cash register and other business management functions. ECRs often have built-in card-acceptance solutions that can handle transactions automatically and allow card data to be passed directly to the computer via integrated terminals and PC peripherals or software-only solutions where card data is hand-entered into the system.

E-commerce payment gateways&nbspallow merchants to accept payment card transactions over the Internet. Shopping cart software allows customers to browse items and select them for purchase, then hands the payment capabilities over to the payment gateway to manage the authorization and submission for settlement of the charge. To ensure that customer card information is protected, most payment gateways transmit sensitive customer information using powerful encryption technology. Payment gateways can sometimes be a third-party website that handles transactions on behalf of the merchant.

Mobile devices&nbspcan act as payment terminals via credit card processing hardware and software add-ons. They collect and transmit data from the point of transaction to the merchant acquirer. Some mobile terminal solutions use a magnetic stripe reader that attaches to the device either in the headphone jack or through the device's mini USB or serial port.

Charge cards&nbsprequire that the full amount charged be paid each month. They typically do not have periodic finance charges but often have annual fees. Charge cards do not generally have a preset spending limit, which allows customers to make large, spontaneous purchases.

Corporate cards&nbspare credit, debit or charge cards designed for business use. They are often tailored to specific business needs such as office supplies, business services or corporate travel. Corporate cards are issued by both small and large businesses to allocate funds for employee expenses, monitor employee expenditures, separate personal and business expenditures, and borrow funds for business purchases. By accepting these cards, a merchant is assured that he/she will not miss out on big sales.

Credit cards&nbspprovide a revolving line of credit, which acts as a loan allowing customers to borrow money to make purchases. The balance can often be carried from month to month and interest accrues on amounts charged.

Debit cards&nbspallow a customer access to the funds in their bank account for purchases. When debit card account data is sent for authorization, the card issuer debits the customer's account so the funds are removed immediately. The time it takes to provide the funds to the merchant varies according to the terms of the merchant agreement.

Gift cards&nbspare cards that are pre-loaded with a dollar amount and given as gifts for the recipient to purchase what he/she wishes. When a business accepts cards, it allows its customer to use the gift card on the items he/she wants and honor the intent of the gift giver.

Prepaid cards&nbsphave a monetary amount pre-deposited into the account, determining the quantity of funds available. These are often reloadable and can be sold at retail outlets. Prepaid cards can be branded with a merchant's logo and can be restricted so that they can only be redeemed at that merchant's locations.

Payment terminals&nbspare minicomputers that securely collect card information and transmit transaction data to acquirers for authorization and payment. They typically feature a keypad and a card swipe reader. The terminals are connected to the business' acquirer via a phone line or the Internet. Merchants can use stand-alone devices or have the payment terminal integrated into an Electronic Cash Register solution.

Electronic Cash Register&nbsp(ECR) is a software solution that manages merchants' point of sale needs, including cash register and other business management functions. ECRs often have built-in card-acceptance solutions that can handle transactions automatically and allow card data to be passed directly to the computer via integrated terminals and PC peripherals or software-only solutions where card data is hand-entered into the system.

E-commerce payment gateways&nbspallow merchants to accept payment card transactions over the Internet. Shopping cart software allows customers to browse items and select them for purchase, then hands the payment capabilities over to the payment gateway to manage the authorization and submission for settlement of the charge. To ensure that customer card information is protected, most payment gateways transmit sensitive customer information using powerful encryption technology. Payment gateways can sometimes be a third-party website that handles transactions on behalf of the merchant.

Mobile devices&nbspcan act as payment terminals via credit card processing hardware and software add-ons. They collect and transmit data from the point of transaction to the merchant acquirer. Some mobile terminal solutions use a magnetic stripe reader that attaches to the device either in the headphone jack or through the device's mini USB or serial port.

Glossary

A

B

C

D

E

F

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H

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L

M

N

O

P

Q

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T

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V

W

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Z

A

Authentication

This is a process that queries data on the card or information from the user of the card (such as a PIN number or the consumer's zip code) to ensure that the card issued is not counterfeit and/or stolen.

Authorization

This is an electronic communication to a card issuer seeking approval to submit a particular charge made by the card holder.

B

Bank card

A generic term for payment cards, debit cards and credit cards carrying the Visa or MasterCard logo. This type of card is typically issued by financial institutions.

Batch

A group of transactions sent for capture and settlement in a single electronic communication.

Batch out

The process of compiling authorized transactions and submitting them to a merchant acquirer for payment as a single "batch" of transactions.

C

Capture

This is an electronic request for payment sent from card issuers to merchant acquirers who process the request through the payment networks of the appropriate card issuers.

Card issuer

This is a bank or other financial institution that issues payment cards to consumers and businesses and provides authorization for transactions to be completed. Card issuers interact directly with their card members through bills and account statements. Issuers do not typically interact with merchants, nor do they pay merchants directly, but rather communicate through card networks and merchant acquirers.

Card (payment) network

This independent organization acts as an intermediary between merchant acquirers and card issuers to ensure interoperability of payment solutions around the world. Card networks facilitate the authorization and clearing/settlement processes

Charge cards

This type of card requires that the full amount charged be paid each month. They typically do not have periodic finance charges but often have annual fees. Charge cards do not generally have a preset spending limit, which allows customers to make large, spontaneous purchases.

These are credit, debit or charge cards designed for business use. They are often tailored to specific business needs such as office supplies, business services or corporate travel. Corporate cards are issued by both small and large businesses to allocate funds for employee expenses, monitor employee expenditures, separate personal and business expenditures, and borrow funds for business purchases. By accepting these cards, a merchant is assured that he/she will not miss out on big sales.

Credit card, charge card, debit card, prepaid card

These cards define payment based on where funds are sourced from for payment to the merchant. Credit cards act as a loan and get funds from the financial institution. Debit cards get funds directly from consumers, bank accounts. Prepaid cards have pre-allocated funds on the card.

Credit cards

These cards provide a revolving line of credit, which acts as a loan allowing customers to borrow money to make purchases. The balance can often be carried from month to month and interest accrues on amounts charged.

D

Debit cards

These cards allow a customer access to the funds in his/her bank account for purchases.

E

E-commerce payment gateway

This software service acts like a payment terminal, collecting card information from online (e-commerce) purchases then sending the data securely and electronically to the merchant acquirer. It can be purchased in a bundle with a merchant acquiring account or as a separate service.

F

G

Gift cards

These are cards that are pre-loaded with a dollar amount and given as gifts for the recipient to purchase what they wish. When a business accepts cards, they allow their customer to use the gift card on the items he/she wants and honor the intent of the gift giver.

H

I

Integrated POS solutions

This package refers to POS and store management solutions that work together versus having stand-alone components.

Interchange fees

This is a fee paid by the merchant acquirer to the card issuing bank. It can vary according to type of card, type and size of the accepting merchant, type of transaction, as well as other factors. The credit card networks typically determine this fee.

J

K

L

M

Magnetic (mag) stripe

Located on the back of plastic payment cards, this stripe (usually black or grey) is capable of storing data on a band of magnetic material. The magnetic band is frequently referred to as the "magnetic stripe" or "magstripe".

Merchant acquirer

Sometimes also called a card processor, this is an institution that provides card processing services to merchants. Merchant acquirers are divided into two categories: bank acquirers and non-bank acquirers. Bank acquirers are financial institutions that provide merchant acquiring services in addition to other banking solutions. Non-bank acquirers, or Independent Sales Organizations (ISO), work under the supervision/sponsorship of a bank and generally specialize in providing acquiring services. An acquirer sends transactions to the card networks and gets paid by the card networks and then funds the merchants

Merchant Discount Rate (MDR)

This fee is withheld from merchant settlement or debited from the merchant,s checking account on a daily, weekly or monthly basis for card processing services.

N

Network assessments

These are fees paid by merchant acquirers and card issuers to payment networks.

O

Other fees

These can include a monthly minimum fee, a per.transaction fee, statement fees, and research, special collections and authorization fees. They vary by acquirer and are outlined in the merchant agreement.

P

Payment acceptance solution

This is a secure method for merchants to collect card numbers and electronically send transaction data to their merchant acquirer. The best solution for merchants depends on the merchant,s point of sale configuration, which could include a payment terminal, an electronic cash register, payment gateway and/or an electronic shopping cart or a mobile device

Payment card

This is a plastic card that can be used to trigger an electronic payment via a bank-to-bank transfer in lieu of cash. These include charge cards, credit cards, debit cards, prepaid cards and others. A card issuer provides the payment card to consumers and sets up and manages the account and transactions between entities throughout the process.

Payment terminal

This is a minicomputer that collects card information at the point of purchase and continues the processing workflow by sending the data securely and electronically to the merchant acquirer.

Point of sale

This refers to the physical location where merchants and consumers complete sales.

Point of sale solutions

This is any software or hardware that merchants use at the point of sale to make a transaction, including cash registers or electronic cash registers, self checkout apparatus, barcode scanners, conveyer belts, payment terminals, change dispensers, receipt printers, etc.

Prepaid card

These cards have a monetary amount pre-deposited into the account, determining the quantity of funds available. These are often reloadable and can be sold at retail outlets. Prepaid cards can be branded with a merchant's logo and can be restricted so that they can only be redeemed at that merchant's locations.

Q

R

Rewards card

This is a credit, charge, debit, prepaid or corporate card that offer cardholders extra value for purchases in the form of cash rebates or reward points. Reward points can be redeemed for things like airline tickets, retail gift cards, hotel stays, and electronics. How rewards are earned and redeemed varies per card issuer.

This software is integrated into the online shopping experience - acting like a virtual cash register - automatically adding up purchases and completing checkout for consumers.

Swipe reader

This device reads embedded data from magnetic material such as a magstripe on a payment card. Swipe readers come standard with any payment terminal or can be added to PCs or mobile devices as peripherals.

T

Transaction (card) processing

This is how card information is collected at the point of sale and sent electronically to the merchant acquirer for authorization and payment.

This is a process that queries data on the card or information from the user of the card (such as a PIN number or the consumer's zip code) to ensure that the card issued is not counterfeit and/or stolen.

Authorization

This is an electronic communication to a card issuer seeking approval to submit a particular charge made by the card holder.

B

Bank card

A generic term for payment cards, debit cards and credit cards carrying the Visa or MasterCard logo. This type of card is typically issued by financial institutions.

Batch

A group of transactions sent for capture and settlement in a single electronic communication.

Batch out

The process of compiling authorized transactions and submitting them to a merchant acquirer for payment as a single "batch" of transactions.

C

Capture

This is an electronic request for payment sent from card issuers to merchant acquirers who process the request through the payment networks of the appropriate card issuers.

Card issuer

This is a bank or other financial institution that issues payment cards to consumers and businesses and provides authorization for transactions to be completed. Card issuers interact directly with their card members through bills and account statements. Issuers do not typically interact with merchants, nor do they pay merchants directly, but rather communicate through card networks and merchant acquirers.

Card (payment) network

This independent organization acts as an intermediary between merchant acquirers and card issuers to ensure interoperability of payment solutions around the world. Card networks facilitate the authorization and clearing/settlement processes

Charge cards

This type of card requires that the full amount charged be paid each month. They typically do not have periodic finance charges but often have annual fees. Charge cards do not generally have a preset spending limit, which allows customers to make large, spontaneous purchases.

These are credit, debit or charge cards designed for business use. They are often tailored to specific business needs such as office supplies, business services or corporate travel. Corporate cards are issued by both small and large businesses to allocate funds for employee expenses, monitor employee expenditures, separate personal and business expenditures, and borrow funds for business purchases. By accepting these cards, a merchant is assured that he/she will not miss out on big sales.

Credit card, charge card, debit card, prepaid card

These cards define payment based on where funds are sourced from for payment to the merchant. Credit cards act as a loan and get funds from the financial institution. Debit cards get funds directly from consumers, bank accounts. Prepaid cards have pre-allocated funds on the card.

Credit cards

These cards provide a revolving line of credit, which acts as a loan allowing customers to borrow money to make purchases. The balance can often be carried from month to month and interest accrues on amounts charged.

D

Debit cards

These cards allow a customer access to the funds in his/her bank account for purchases.

E

E-commerce payment gateway

This software service acts like a payment terminal, collecting card information from online (e-commerce) purchases then sending the data securely and electronically to the merchant acquirer. It can be purchased in a bundle with a merchant acquiring account or as a separate service.

F

G

Gift cards

These are cards that are pre-loaded with a dollar amount and given as gifts for the recipient to purchase what they wish. When a business accepts cards, they allow their customer to use the gift card on the items he/she wants and honor the intent of the gift giver.

H

I

Integrated POS solutions

This package refers to POS and store management solutions that work together versus having stand-alone components.

Interchange fees

This is a fee paid by the merchant acquirer to the card issuing bank. It can vary according to type of card, type and size of the accepting merchant, type of transaction, as well as other factors. The credit card networks typically determine this fee.

J

K

L

M

Magnetic (mag) stripe

Located on the back of plastic payment cards, this stripe (usually black or grey) is capable of storing data on a band of magnetic material. The magnetic band is frequently referred to as the "magnetic stripe" or "magstripe".

Merchant acquirer

Sometimes also called a card processor, this is an institution that provides card processing services to merchants. Merchant acquirers are divided into two categories: bank acquirers and non-bank acquirers. Bank acquirers are financial institutions that provide merchant acquiring services in addition to other banking solutions. Non-bank acquirers, or Independent Sales Organizations (ISO), work under the supervision/sponsorship of a bank and generally specialize in providing acquiring services. An acquirer sends transactions to the card networks and gets paid by the card networks and then funds the merchants

Merchant Discount Rate (MDR)

This fee is withheld from merchant settlement or debited from the merchant,s checking account on a daily, weekly or monthly basis for card processing services.

N

Network assessments

These are fees paid by merchant acquirers and card issuers to payment networks.

O

Other fees

These can include a monthly minimum fee, a per.transaction fee, statement fees, and research, special collections and authorization fees. They vary by acquirer and are outlined in the merchant agreement.

P

Payment acceptance solution

This is a secure method for merchants to collect card numbers and electronically send transaction data to their merchant acquirer. The best solution for merchants depends on the merchant,s point of sale configuration, which could include a payment terminal, an electronic cash register, payment gateway and/or an electronic shopping cart or a mobile device

Payment card

This is a plastic card that can be used to trigger an electronic payment via a bank-to-bank transfer in lieu of cash. These include charge cards, credit cards, debit cards, prepaid cards and others. A card issuer provides the payment card to consumers and sets up and manages the account and transactions between entities throughout the process.

Payment terminal

This is a minicomputer that collects card information at the point of purchase and continues the processing workflow by sending the data securely and electronically to the merchant acquirer.

Point of sale

This refers to the physical location where merchants and consumers complete sales.

Point of sale solutions

This is any software or hardware that merchants use at the point of sale to make a transaction, including cash registers or electronic cash registers, self checkout apparatus, barcode scanners, conveyer belts, payment terminals, change dispensers, receipt printers, etc.

Prepaid card

These cards have a monetary amount pre-deposited into the account, determining the quantity of funds available. These are often reloadable and can be sold at retail outlets. Prepaid cards can be branded with a merchant's logo and can be restricted so that they can only be redeemed at that merchant's locations.

Q

R

Rewards card

This is a credit, charge, debit, prepaid or corporate card that offer cardholders extra value for purchases in the form of cash rebates or reward points. Reward points can be redeemed for things like airline tickets, retail gift cards, hotel stays, and electronics. How rewards are earned and redeemed varies per card issuer.

This software is integrated into the online shopping experience - acting like a virtual cash register - automatically adding up purchases and completing checkout for consumers.

Swipe reader

This device reads embedded data from magnetic material such as a magstripe on a payment card. Swipe readers come standard with any payment terminal or can be added to PCs or mobile devices as peripherals.

T

Transaction (card) processing

This is how card information is collected at the point of sale and sent electronically to the merchant acquirer for authorization and payment.